Facebook: Zuckerberg Rallies Stock, But Price Targets Cut as Well

By Tiernan Ray

There is a surprisingly mixed reaction to Facebook (FB) CEO Mark Zuckerberg‘s appearance last night at the TechCrunch “Disrupt” conference, the first public appearance by Zuckerberg since the stock’s IPO on May 18th.

The shares are up this morning, rising $1.05, or 5.4%, to $20.48, but not everyone is satisfied.

On the positive side, RW Baird’s Colin Sebastian came away from the Zuckerberg interview convinced that “Long-term opportunities should ultimately trump near-term revenue and expense headwinds.”

He was encouraged by Zuckerberg’s remarks about mobile use of Facebook, which suggest to him that monetization of mobile can improve:

Mobile monetization is improving. According to MZ, the market is underestimating Facebook in terms of the benefits of mobile. While the company was relying too much on the “mobile web” (HTML 5) initially, new native apps will significantly help drive usage. Importantly, the company’s recent launch of iOS apps is driving higher levels of engagement, including a doubling of viewing stories on the “News Feed,” and just as important, mobile ads are now performing better than desktop display ads on the core website, consistent with our prior research and checks at this week’s Shop.org conference. In addition, product teams are now better integrated at Facebook, each focused on mobile platforms, and the company has a large pipeline of new products planned for the next 6-9 months.

Jefferies & Co.’s Brian Pitz, who has a Buy rating on the shares and a $30 price target, writes that the most interesting thing he heard was when Zuckerberg said the company already has a team set up working on search:

The biggest takeaway from today’s event was Zuckerberg’s confirmation that Facebook would eventually enter the search business. He noted the company was already processing 1B queries each day “without even trying.” Of these, most are people-searches but a meaningful amount are searches looking for brand pages, places, or apps. Zuckerberg called this a “big opportunity,” and said Facebook could help users locate good sushi restaurants, or locate people who have worked for a specific company.
Facebook already has a team in place working on search, which is not surprising given the company sees so many daily queries. But monetization will take time and we think the relatively narrow scope of Facebook’s search limits overlap with GOOG, for now. Overall, we think commercially-oriented searches are inherently valuable and we do see upside as we do not include search in our model. But we won’t get too excited until we hear more details, and our estimates remain unchanged.

And Topeka Capita Markets’s Victor Anthony, who has a Buy rating on the stock and a $36 price target, was overall more reassured about Zuckerberg as a chief executive:

We came away from Mark Zuckerberg’s first public presentation since the IPO incrementally more positive on his ability to manage Facebook’s mobile transition and to bring to fruition the optionality we see embedded in the platform [...] Zuckerberg sounded confident that Facebook can monetize mobile and extend the platform to online search. Importantly, Zuckerberg stated that while FB is a mission driven company (building great services to make the world more connected and open) they are also business driven (making money) and the two concepts are interrelated into the company’s philosophy. This should assuage fears that a focus on their mission trumps monetization efforts at the firm.

But along with the cheers came a couple of estimate and price-target reductions this morning.

Ken Sena with Evercore Partners, who has an Equal Weight rating on the stock, cut his price target to $23 from $34 after cutting his estimates. While he still believes in Facebook’s opportunity on mobile devices, he thinks the company is seeing a decline in “engagement” by users that’s not fully made up for by mobile.

Writes Sena,

U.S. comScore data show Aug time spent down 12% pro forma (down 14% reported) y/y. The declines are primarily attributed to age groups 12-17 and 18-24, which declined 42% and 25%, respectively. Mobile migration provides only partial answer. Although FB is experiencing accelerated desktop declines vs. the broader web, we find growth in mobile engagement to be just in line, relative to peers, such as Google and Apple, suggesting share loss in time spent when consolidated for desktop and mobile.

And Needham & Co.’s Laura Martin this morning reiterates a Buy rating, but cut her price target to $25 from $40, writing that while she still likes the “long-term optionality” of Facebook, she has concerns about mobile and about the company’s ability to monetize its international growth.

Regarding Zuckerberg’s comment that the company should have been quicker to develop “native” applications for Apple’s (AAPL) iPad and iPhone, and for mobile devices running Google’s (GOOG) Android software, Martin is concerned this has prolonged the revenue opportunity from mobile:

FB, with some of the smartest employees on planet Earth, has been slow to monetize consumers’ rapid shift from desktop to mobile, compared with peers. We project FB’s mobile revenue at approximately $150mm in 2012, out of $4.9B total. Yesterday, Mark Zuckerberg stated that FB’s biggest mistake was that it had burned 2 years committed to HTML5 rather than Native, which is needed for mobile: This suggests more time.

Regarding international, Martin is encouraged by its growth but worried its not contributing that much anytime soon:

We believe FB has done a great job at building a global platform. However, monetization in business generally follows an 80/20 rule. We expect the US (20% of FB users) to represent 80% of near-term economics. Therefore, we have been disappointed that the US isn’t more of a priority vs adding another 50mm users.

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There are 2 comments

SEPTEMBER 12, 2012 12:04 P.M.

yawn wrote:

Short FB

SEPTEMBER 14, 2012 4:16 A.M.

donzoab wrote:

How much credibility do most of these analysts really have here? Most were in the high 30's and low to mid 40's with their early calls during the IPO. Many now in the low 20's and hanging their hats on What If's and hopes and dreams. This isn't investing, it's pure gambling. There is very little to base your buy decision on here beyond the "possibility to monetize the user base" and it's all speculation. I can only hope that FB is a fad that willl eventually end and people will get back to real face to face interaction.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.